Meltdown unlikely, says Stanford economist

SAN JOSE, Calif.  A general economic slowdown is the most likely result of the current woes on Wall Street, according to a leading economist.

The electronics industry should fare better than most in such a scenario, said A. Michael Spence, a 2001 Nobel laureate in economics. However, he cautioned a small risk still remains that the current crisis could lead to a broader meltdown.

"Bottom line is that no one will be untouched, [and] electronics should experience a slowdown but perhaps less so than the financial sector and perhaps the overall economy," wrote Spence, former Dean of Stanford's Graduate School of Business in an email exchange. "The IPO market could be difficult for an extended period and having financing and conserving cash by keeping cash burn down would be advisable," he said.

Spence chairs the Commission on Growth and Development, a group of 21 world leaders convened in April 2006 to conduct a two year study of ways to address sustained economic growth and reduction of poverty globally. He took out time from travels in Europe to respond to an inquiry from EE Times on the current U.S. financial crisis.

"We are in for a period of slow growth in the US, Europe and probably Japan. Asia is likely to hold up better in terms of growth," he said.

As for the demand for electronics, "for at least a couple of years, it seems right to guess that demand in important electronics sectors will slow down or worse in these financial sectors," he said.

"In terms of finance, electronics tends to be less dependent on leverage and venture capital is quite free of debt. So the funding of startups and the balance sheets in most of the electronics sectors should be less affected than other parts of the economy," he added.

Spence cautioned he could not rule out a small risk of a more general financial meltdown.

"The main immediate risk on Wall Street is a complete credit lockup, resulting from damaged balance sheets, lack of transparency and visibility and a downward spiral based on those ingredients. This has started to happen a couple of times and been averted with quick action by the Fed, the Treasury, and other central banks," he said.

"If this were to happen there would be a very deep recession that would adversely affect the economy broadly and it would show up in reduced demand. It would spill over into the global economy, differentially depending on the region but very broadly. Electronics output and sales would slow dramatically but not uniquely," he said.

Some industry analysts said they remain hopeful but are taking a wait-and-see attitude on the situation.